Cash for Clunkers Hurt the Auto Industry

Cash for Clunkers was presented as an easy way for the government to help the auto industry.

But it didn’t. The government is so big and powerful it should be able to help an industry. Even as a conservative, I don’t disagree with that statement. I don’t approve of it because it can only help an industry by hurting another area of society. I don’t believe it is right for the government to sacrifice some for the sake of others. But I don’t deny that the government can, in theory, help a group that it wants to help. For example, the government is constantly helping plutocrats at the expense of the rest of us.

But outside a rather narrow zone, inevitably, the government almost always fails to even reach its stated goals. The problem is that governments are run by politicians. And politicians require multiple constituencies. They make “compromises.” But these compromises don’t really compromise, they simply self-destruct and bring about failure.

The law of unintended consequences is a brutal thing, though, especially for inexperienced, shortsighted policymakers.

According to the findings of three Texas A&M University economics professors, “Cash for Clunkers” ultimately caused auto industry revenue to shrink by about $3 billion in less than a year

The professors issued the results of their research last month in a National Bureau of Economic Research-sponsored working paper entitled “Cash for Corollas: When Stimulus Reduces Spending.”

“This highlights how — even over a relatively short period of time — a conflicting policy objective can cause a stimulus program to instead have a contractionary net effect on the targeted industry,” the trio of economists wrote, according to The Wall Street Journal’s Market Watch.

“By lowering the relative price of smaller, more fuel-efficient vehicles, the program induced households to purchase vehicles that cost between $4,000 and $6,000 less than the vehicles they otherwise would have purchased.”

For one month, the nearly-$3 billion program increased the sales of tiny, low-profit-margin vehicles. In the next few months, though, all sales faded rapidly.

Overall, the Obama administrative initiative produced exactly no net increase for the number of automobiles Americans purchased.

So the desire to both induce more car purchases and to direct those purchases in a “green” direction annulled the value of the program. This means that the auto industry’s “recovery”—to the extent that it has recovered—has happened despite and not because of the government program.